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Fiscal Policy in Unionized Labor Markets

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  • Ardagna, Silvia
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    Abstract

    This paper investigates the effects of fiscal policy on economic activity, public finances, welfare, and income distribution in a dynamic general equilibrium model with a unionized labor market. The paper shows that debt-financed increases of public employment, wages of public sector employees, unemployment benefits, and labor taxes put pressure on unions’ wage claims, leading to higher private sector wages, lower employment, capital, and output. In addition, increases of public employment, public wages and unemployment benefits increase workers’ utility relative to the pre-policy change equilibrium during the transition, but not in the long-run. Instead, workers’ utility decreases at any time horizon when labor taxes increase. Capitalists always benefit from increases in taxes on labor but their welfare decreases when public spending goes up. Finally, the paper investigates the extent to which the way the government balances its budget affects these results.

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    File URL: http://dash.harvard.edu/bitstream/handle/1/2580048/Ardagna_FiscalPolicy.pdf
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    Bibliographic Info

    Paper provided by Harvard University Department of Economics in its series Scholarly Articles with number 2580048.

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    Date of creation: 2007
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    Publication status: Published in Journal of Economic Dynamics and Control
    Handle: RePEc:hrv:faseco:2580048

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    16. Ardagna, Silvia, 2004. "Fiscal Stabilizations: When Do They Work and Why," Scholarly Articles 2580047, Harvard University Department of Economics.
    17. Ardagna, Silvia, 2004. "Fiscal stabilizations: When do they work and why," European Economic Review, Elsevier, vol. 48(5), pages 1047-1074, October.
    18. Devereux, Michael B & Head, Allen C & Lapham, Beverly J, 1996. "Monopolistic Competition, Increasing Returns, and the Effects of Government Spending," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(2), pages 233-54, May.
    19. Johannes Horner & L. Rachel Ngai & Claudia Olivetti, 2004. "Public enterprises and labor market performance," LSE Research Online Documents on Economics 3529, London School of Economics and Political Science, LSE Library.
    20. C. John McDermott & Robert F. Wescott, 1996. "An Empirical Analysis of Fiscal Adjustments," IMF Staff Papers, Palgrave Macmillan, vol. 43(4), pages 725-753, December.
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    22. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
    23. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
    24. Ludvigson, Sydney, 1996. "The macroeconomic effects of government debt in a stochastic growth model," Journal of Monetary Economics, Elsevier, vol. 38(1), pages 25-45, August.
    25. Ohanian, Lee E, 1997. "The Macroeconomic Effects of War Finance in the United States: World War II and the Korean War," American Economic Review, American Economic Association, vol. 87(1), pages 23-40, March.
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